An options market for crypto currencies is
emerging that could escalate the growth of Bitcoin and Ripple.
LedgerX an institutional trading and clearing platform is
waiting for Commodity Futures Trading Commission approval to
trade and clear options on Bitcoin for the institutional
market.

The LedgerX application, filed in September 2014,
is still under review. The CFTC has sometimes taken a year to
review and approve clearing licences.

Paul Chou, chief executive and co-founder of
LedgerX, and an alumnus of Goldman Sachs and the Massachusetts
Institute of Technology, says that banks, while curious about
Bitcoin trading, have been waiting for a regulatory framework
to coalesce.

"Banks have set up working groups to look at the
technology and some have made investments into Bitcoin
companies," he says. "But the banks are waiting for a federally
regulated platform before they start to provide liquidity and
to trade bitcoin."

He adds: "A regulated infrastructure will provide
the transparency and security needed to attract institutional
investors and to grow the market."

In April, Goldman Sachs led a $50 million funding
round for Bitcoin financial services start-up, Circle Internet
Financial. Circle offers mobile payments funded in US dollars
or Bitcoins. It plans to add more currencies and expand in
China.

"The investment is a great signal that Wall
Street is interested in digital currencies," says
Chou.

Imperatives

Trading of Bitcoin derivatives currently happen
over-the-counter, through bi-lateral trades or on unregulated
international exchanges. "There are many institutional
investors who need to stay within a US jurisdiction. They need
to trade with a US-banked, US-domiciled and US-cleared
exchange," says Chou. "For investors to include this asset into
their portfolios, a CFTC-regulated exchange and clearing house
is an imperative."

He says a federally regulated exchange would
allow investors to meet compliance hurdles that have been
holding them back. "In addition, bitcoin options give investors
a method to trade and hedge volatility, making bitcoin a more
attractive asset," he says.

James Newsome, former chairman of the CFTC,
former chief executive of NYMEX, and one of two independent
directors on LedgerX’s board, says: "Digital
currency derivatives present a huge opportunity, but to gain
mainstream adoption, a regulated market will need to be
developed. By providing liquidity and a secure venue for
investors to manage short and long-term risk, LedgerX will
facilitate the evolution and adoption of these products."

Bitcoin volatility has been an issue for those
who use the currency. At one point in 2013 its volatility was
20 times that of the average S&P500 stock.

"Bitcoin volatility has come down but having an
options market can reduce that volatility further," says Chou.
It will also allow users the opportunity to hedge their
exposure to fluctuations. Mining companies are among the
largest users of Bitcoin, and enterprises like Dell, Microsoft,
Expedia, United Way, Paypal and 1-800 FLOWERS accept
Bitcoin.

A regulated infrastructure will provide the
transparency and security needed to attract
institutional investors

Paul Chou

"Compared to three years ago, many more high
calibre firms accept and use the currency," says Chou. Indeed
some 80,000 companies now accept it. Chou says the growth of
digital currencies is hard to predict. "To date, the growth in
Bitcoin has been entirely organic but already the market
capitalisation is at several billion dollars.

Centralized clearing will allow the exchange, if
it gets the go-ahead, to novate each trade. "This allows firms
to treat Bitcoin options like they would any other option
trade," says Chou.

It will be a big step by the CFTC. There are only
14 active clearing-house licences in the US. The last one was
issued in December 2013.

Other smaller firms are setting up, keen to ride
on LedgerX’s tail. In Boston, Alt-Options has just
launched its 1.5 version of an options trading platform for
Bitcoin, which simulates block chains and the price of
Bitcoin.

Its founders Joe Zhou and Marco Cuesta are
planning a formal launch at the end of the summer following a
simulated Bitcoin trading competition with Hong Kong based
exchange BitMex.

"We are more focused on the retail side, unlike
LedgerX and Tera Exchange, and in allowing individual traders
and speculators to gain exposure to bitcoin through trading
listed options," says Cuesta. "In the future we see ourselves
working more like a broker/dealer that could potentially trade
the products that firms like Ledger provide and do the clearing
with them. It’s a little too soon to say though
until the regulatory environment is clearer."

Cuesta says the future of Bitcoin is not certain
and making the platform open to other currencies like Ripple or
Litecoin is important for Alt-Options. Zhou adds that while
Bitcoin is the most well-known, Ripple is an improved
version.

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